How Europe’s Budget Straightjacket was Born

Guy Abeille is known as “Monsieur 3%” . He’s the inventor of a concept signed up to and repeated ad nauseam by all French governments of both right and left for three decades, and all EU countries from 1992 under the Maastricht Treaty: “The public deficit must not exceed 3% of the national wealth (GDP).”

The 3 % rule that has justified all spending cuts, tax increases, and reforms in Europe over the past thirty years. So to what economic modelling did it owe its origin? Le Parisien newspaper posed the question when it came across the economist in a cafe on the left bank some 18 months ago. And this was the answer.

“We dreamt up this figure of 3% in less than an hour; it was born on the back of the envelope, without any theoretical reflection. “

It happened right at the start of the first term of France’s first Socialist President, Francois Mitterrand, who, ironically, was about to launch a radical Keynesian-style reflation of the depressed economy, through nationalisations, higher investment in public services, increases in wages and welfare, cuts to the working week and a tax on wealth, inspired by a common programme with the communists. These radical policies were abandoned two years later.

“It was a night in May 1981. Pierre Bilger, the Budget Director at the time, summoned us, together with Roland de Villepin (cousin of one time PM Dominique de Villepin). He told us : [Socialist President] Mitterrand wants us to quickly provide him with an easy rule, which sounds like economics and can be used against ministers who march into his office to ask him for money,” Abeille told Le Parisien.

In his office at the Louvre, which at the time was the home of the Ministry of Finance, Abeille scratched his head.

Same round figure for the deficit? They considered a deficit ratio to GDP of 1%. But “this figure was eliminated as it was impossible to achieve. 2 % ? This put us under pressure too.” 3 %? “This was a good figure, a figure that has travelled through the ages, it was reminiscent of the Trinity.” So they go for 3%.

“Mitterrand wanted a rule, we gave it to him. We did not think it was going to last beyond 1981,” he added.

But the “3%” lasted. According to Abeille, Laurent Fabius – Mitterrand’s Socialist Minister of Finance, later PM and now foreign minister under another socialist President, Francois Hollande, was the first to talk about the deficit as a percentage of GDP, but he felt it too lax. He preferred 2.6%.

So who championed the 3% figure? “It was Mitterrand who took it as his own, using it to give himself legitimacy. Later, this reference was to be theorized by economists and included in the Maastricht Treaty, becoming one of the criteria to join the euro zone. “

Today, this “3%” dictates the daily lives of the French and the other 17 eurozone members. It dictates whether to build – or not – schools, hospitals, nurseries or raise taxes.

What does “Monsieur 3%” think of the 0.5% threshold of “structural deficit” imposed by the latest EU treaty, the fiscal compact or formally, the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, signed by all EU states bar the Czech Republic and the UK in 2012 and which entered into force in January 2013. “It is true that the number zero has its advantages. But if we had made it 0.7%, people would asked why that number? While 0.5% is halfway, not a bad figure, a comfortable number.”

So reported Le Parisien The obvious conclusion? That European austerity, and associated policies of privatisation and deregulation, are nothing to do with sound economics and everything to do with politics; the kind of politics that is designed to benefit a tiny elite and dreamed up, for expediency’s sake, on the back of an envelope!